J. J. Coughlan Ltd. v Ruparelia & Ors

The defendants have at all material times been in practice as partners in a firm of solicitors known as Ruparelia Thaker. In these proceedings, the claimant alleges that it was the victim of a fraud in which Mr Ruparelia participated, whereby it lost US $500,000. There are two principal claims. The first is a claim in the tort of deceit on the basis of statements made by Mr Ruparelia on 28 June 1999. The liability of the firm in relation to this claim depends on whether the statements were made “in the ordinary course of the business of the firm” within the meaning of section 10 of the Partnership Act 1890 (“the 1890 Act”). The second is a claim for damages for breach of an Escrow Agreement. The firm’s liability in relation to this claim turns on whether the making of the agreement was “an act for carrying on in the usual way business of the kind carried on by the firm” within the meaning of section 5 of the 1890 Act.

Following a trial, Mackay J found for the claimant against Mr Ruparelia in respect of both claims, and awarded damages in the sum of $622,520 (inclusive of interest). But he dismissed the claims against the firm on the grounds that the acts of Mr Ruparelia were not in the ordinary course of the business of the firm. He considered that there was no material difference between “the ordinary course of the business” within the meaning of section 10, and “the usual way of business of the kind carried on” within the meaning of section 5. In my judgment, he was right to do so, and the contrary has not been argued on this appeal. The claimant appeals against the dismissal of its claim against the firm with the permission of Ward and Jonathan Parker LJJ.

The claimant company is a successful ground work contractor in the building and engineering field. Its managing director is Mr McGarry. The company’s turnover is about £5 million a year. By 1999, it had built up a sum of about £1 million surplus cash. The directors of the company were looking for investment opportunities. To this end, Mr McGarry engaged the services of Mr Mohanan, who describes himself as a “corporate strategy analyst”. In the middle of 1999, a man called Maher telephoned Mr Mohanan from Canada, saying that he was aware of an investment opportunity. The upshot of this was that on the 28 June Mr McGarry and Mr Mohanan attended a meeting to hear a presentation of a proposed investment. The meeting was also attended by Mr Hinojosa, who produced a business card purporting to show that he represented “Economic Solutions”, which dealt in joint ventures and international bank programmes. Also present were Mr Sarasia of Grosvenor House Finance Corporation (“GHFC”) and Mr Ruparelia. Mr Hinojosa introduced Mr Ruparelia as his solicitor. Mr Ruparelia produced a company letterhead from notepaper showing the name of his firm as “Ruparelia Thaker” with an address in Leicester, and Mr Thaker as his only partner. The judge described Mr Hinojosa as “a fraudsman from beginning to end”, and said that the others (including Mr Ruparelia) “were party to his fraudulent intentions”. There is no challenge to these findings. The investment scheme was described by Mr Hinojosa. It involved the claimant paying $500,000, in return for which it would have the use of a $10 million investment fund for one month. The $500,000 would be paid into Mr Ruparelia’s solicitor’s account. It would be released only after Mr Ruparelia had confirmed that the $10 million was in place with a major bank and he had verified that “bank pay orders” were in his possession. Mr Hinojosa explained that a “bank pay order” was a binding obligation from a bank to pay the claimant its share of the profits. As Mr Hinojosa put it, this would “give the company guaranteed security from the bank”. In return, the claimant would receive as its share in the venture $2.5 million in one month, an annualised return of 6000%. At paras 20 and 21 of his witness statement, Mr McGarry said that he was “rather sceptical” as to whether this return would be achieved, and that his main concern was to ensure that his company’s money was safe. But the judge found that, in the presence of Mr Ruparelia, Mr Hinojosa promised a return of 6000% per annum, and Mr Ruparelia later confirmed this. There is no challenge to this finding of fact. Indeed, there is no challenge to any of his findings of primary fact.

Mr McGarry was anxious to obtain reassurance that his funds would be entirely safe. He was given a number of documents. These included a “Partnership Financial Undertaking” which appeared under the name of an entity called “Solegasa Del Norte” from an address in Mexico. Other documents supplied to the claimant by Mr Ruparelia were drafts of a Principal Agreement and Escrow Agreement. Mr Ruparelia held the Principal Agreement on the disk of a laptop computer that he had with him. He printed off copies at the meeting. He did the same in relation to the Escrow Agreement.

The judge found that Mr Hinajosa assured Mr McGarry that he had effected this investment scheme a number of times previously, that everyone had been paid, returns were very good and that he hoped to have a long-standing relationship with Mr McGarry. After Mr Hinojosa had left the room, Mr McGarry asked Mr Ruparelia for confirmation of what he had been told by Mr Hinojosa. Mr Ruparelia provided that confirmation. The judge found that Mr Ruparelia said that he had worked with the group on a number of occasions, that the returns were very good and that “everybody gets paid and I will ensure that your funds are protected and there is no risk to your money”. Mr Ruparelia’s statements at this meeting form the basis of the claim in tort.

Mr McGarry and Mr Mohanan perused the documents with some care. Mr McGarry wanted some amendments. A further meeting took place on 30 June. Mr McGarry was unable to attend, but Mr Mohanan met Messrs Hinojosa, Ruparelia and Sarasia. Mr Ruparelia said that they could not amend the contract because it was approved by “major authorities or regulatory authorities”. He would, however, give a separate solicitor’s undertaking. Mr Mohanan reported this to Mr McGarry, who authorised the matter to proceed on that basis. Mr Ruparelia drafted a letter of undertaking whose terms did not meet with the approval of Mr McGarry. Another meeting was arranged for 1 July. This was attended by Messrs McGarry, Mohan and Hinojosa. At this meeting, Mr McGarry signed the Principal Agreement and the Escrow Agreement. He did so on the understanding that the funds would not be forthcoming from him until the solicitor’s undertaking was in an acceptable form.

The judge found that the two agreements were “shams” to the knowledge of Mr McGarry. The Principal Agreement was between GHFC and the claimant. It contained a number of recitals which were untrue. These included:

“A The Applicant for himself his agents and principals and all persons for whose benefit he is acting represents and warrants to the Company that:

(1)

he and they are familiar with the type of transaction provided for and contemplated by this Agreement and the Escrow Agreement;

(2)

he has been involved in transactions of the nature of the transaction provided for and contemplated by this Agreement and the Escrow Agreement; ……

….

(4)

the Applicant has been advised of and is aware of the

need for it to take and has taken independent legal

advice in relation to this Agreement and the Escrow

Agreement;”

The operative part of the agreement provided that, upon the parties entering into the Escrow Agreement and upon the Escrow Agents (the defendant firm) receiving the “arrangement fee” of $500,000 from the claimant, the “Bank Advice” evidencing the existence of the investment funds of $10,000,000 would be delivered by the Escrow Agents to the bank nominated by the claimant for that purpose. The agreement contained other detailed provisions to which it is not necessary to refer.

The Escrow Agreement was between the defendants (as Escrow Agents), GHFC and the claimant. This provided for the payment of the arrangement fee to the defendants and the “verification” by them of the “due issue of the Bank Advice by the issuing Bank” (clause 3.1). Clause 4.1 provided:

“The Escrow Agents shall irrevocably pay and release the Arrangement Fee to either the Company or to the Applicant (as the case may be) as follows:

…..

B. In the event that the Bank Advice is not issued within 7 banking days after the date of compliance by the Applicant with the conditions precedent set out in clause 2.1 of the Principal Agreement or that the Escrow Agents are unable to satisfy themselves that the Bank Advice has been duly issued by the Issuing Bank or that it does not in all material respects conform to the text set out in Schedule A of the Principal Agreement, then the Escrow Agents shall release and pay the Arrangement Fee to the Applicant or to its order”.

The claimant’s contractual claim is that there was a breach of clause 4.1 of the Escrow Agreement.

In support of his conclusion that this agreement was a sham, the judge relied on a number of false statements contained in some of its provisions. He referred to clause 5(h) whereby the parties agreed that “the Escrow Agents are not solicitors…for either the [claimant] or [GHFC]…and have not advised either of them in relation to the Escrow Agreement or the Principal Agreement…”. He also relied on clause 5(i)(j) and (k) which contained “warranties” that (save in immaterial respects) the Escrow Agents had not given the claimant any advice or made any representations prior to the making of the Principal Agreement and the Escrow Agreement. Our attention was drawn by Mr Pooles QC to other provisions of the Escrow Agreement which he submitted also contained untrue statements.

On 2 July, Mr McGarry wrote to Mr Ruparelia confirming that he had signed the two agreements, and stating:

“ Mr Medina [this was a reference to Mr Hinojosa] has assured me that he will send me an amendment to the Principal Agreement to confirm that the Escrow will be released only after you have received copies of the pay orders in our favour and verified their authenticity. We can also accept if you give this undertaking in a separate letter. On receipt of this, we will transfer $500,000 to your co-ordinates immediately”.

On 3 July, there was a further meeting at which Mr Ruparelia generated a further document on his word processor. This was a letter of undertaking which, following further amendments, was in a form acceptable to Mr McGarry. Following further meetings, on 6 July, Mr McGarry transferred $500,000 to the dollar account of the firm Ruparelia Thaker. He never saw that money again. On 13 July, Mr Ruparelia wrote to the claimant stating that the firm had received and verified the documentation and had paid away the funds. Copy documentation was later sent to the claimant on 27 July. There was in fact no genuine investment and no bank pay order was ever produced.

In relation to the question whether the acts of Mr Ruparelia and the Escrow Agreement were in the ordinary course of business of the defendant firm, the judge said that it was agreed between the parties that the legal test was:

“…whether, viewed subjectively and objectively, what Ruparelia did was in the ordinary course of business of the firm or was an action carried out in the usual way of the kind carried on by it. It is necessary, in order for this to obtain, for the person dealing with the partner subjectively to have formed the honest belief that this is so. Of course, if he does not, that is the end of the matter”.

So far as the objective element was concerned, he set out the following propositions of law:

“(1)

The principles of vicarious liability of partners for each other’s actions derived from and were developed out of the principles of vicarious liability of principal and agent and employer and employee (see Dubai Aluminium Company v Salaam [2001] QB 113 per Evans LJ 132H-133A).

(2)

This liability can extend to fraudulent acts or omissions if those were carried out in the course of the employment or within the scope of the apparent authority, albeit by an employee or a partner conducting the business of a type which he had a right to conduct (see Lloyd v Grace, Smith & Co [1912] AC 716).

(3)

It is necessary to show that all the acts or omissions which make the partner liable were committed within the scope of his authority as a partner (see Dubai Aluminium, 133C-D). If the partner deals as part of the dishonest scheme with others, who are party to that dishonesty, his acts will not be in the ordinary course of business of the firm. If, however, those with whom he deals are not parties to his dishonesty but innocent of complicity in it, then his partners may be liable (see Dubai Aluminium, 133E-134E and 142E-143A per Aldous LJ).

Where solicitors are concerned, it will only be in the ordinary course of business of the firm for the solicitor to do an act where there was an underlying transaction of a kind which was part of the usual business of a solicitor. I adopt what was said by Glidewell LJ in United Bank of Kuwait Ltd v Hammoud and Others [1988] 1 WLR 1051. “On the facts represented to the [third party] would a reasonably careful and competent person [such as the third party] have concluded that there was an underlying transaction of a kind which was part of the usual business of a solicitor?”

That citation, in my judgment, properly preserves the distinction which Mr Sutcliffe was anxious to preserve between the character of the act, on the one hand, which is important and the manner in which it was carried out, on the other.

The important question is how the facts reasonably appeared to the third party rather than what was in fact going on (United Bank of Kuwait v Hammoud and Others, 1064E-F.”

It is to be noted that the judge did not have the benefit of the decision of the House of Lords in Dubai Aluminium [2002] 2 WLR 1913.

The judge’s conclusion appears in this passage at page 29:

“I am, therefore, unable to find that the relevant representatives of the claimant, Mr McGarry and Mr Mohan, honestly believed that what Mr Ruparelia was doing up to 3^rd July, when he gave the written undertaking, was a normal transaction in the course of the business of a solicitor.

I accept Mr Sutcliffe’s argument that it is the character of the action, not the manner in which it is carried out; and that in many contexts, for a solicitor to attend a negotiation with a client, is a normal and conventional part of his ordinary course of business as a solicitor. But there was nothing normal about this transaction, really, as everyone accepts, and what Mr Hinojosa was apparently doing was not something which any solicitor had business to be actively assisting in. That was so, as I find, as a matter of probability, to the knowledge of Mr McGarry and Mr Mohan. So far as the objective bystander is concerned, I find, as a matter of certainty, that he would have said the same.”

In reaching this conclusion, the judge relied on the following facts: (a) Mr McGarry and Mr Monahan were dealing with a solicitor who was “prepared enthusiastically to “hype” and sell actively what they knew to be an abnormal and incredible scheme” (page 26); (b) when Mr McGarry signed the Principal and Escrow Agreements, he knew that they were “pure shams” (page 26).

Mr Sutcliffe QC accepts that the judge correctly described the test to be applied in determining vicarious liability for the wrongful acts of a partner, but he submits that the judge failed to apply that test properly. In summary, he submits first that it was not reasonably open to the judge to find that the Principal and Escrow Agreements were shams, or that Mr McGarry knew that they were shams; secondly that, apart from the sham points, the judge relied on no other evidence to support his conclusion that the claimant did not believe that Mr Ruparelia was acting in the normal course of business of the defendant firm; thirdly, he gave no reasons for holding that what Mr Hinojosa “was apparently doing was not something which any solicitor had business to be actively assisting in”; and fourthly, in reaching this conclusion, the judge fell into the error of addressing the manner rather than the character of Mr Ruparelia’s acts. In deciding that what Mr Ruparelia did was not in the ordinary course of a solicitor’s business, he concentrated on the particular nature of the specific transaction. Instead, he should have addressed the question whether Mr Ruparelia’s acts were of the kind or class of acts which are done in the ordinary course of a solicitor’s business. Had he done so, he would have reached the opposite conclusion.

It is common ground that the judge accurately summarised the relevant legal principles in the passage already cited (para 14 above). As I have said, this summary was made without the benefit of the House of Lords decision in Dubai Aluminium. In that case, their Lordships made authoritative statements as to the meaning of “acting in the ordinary course of the business of the firm” in section 10 of the 1890 Act. Lord Nicholls (with whom Lord Slynn and Lord Hutton agreed) said that, except where the wronged party is defrauded by a person acting within the scope of his apparent authority (para 28), authority is not the touchstone of what is done in the ordinary course of employment or business. At para 23, he said:

“Perhaps the best general answer is that the wrongful conduct must be so closely connected with acts the partner or employee was authorised to do that, for the purpose of the liability of the firm or the employer to third parties, the wrongful conduct may fairly and properly be regarded as done by the partner while acting in the ordinary course of the firm’s business or the employee’s employment”

In the present appeal, both counsel argued the case on the footing that the issue was whether Mr Ruparelia’s statements and his acts in relation to the Escrow Agreement were within the scope of his ostensible authority. The cases to which our attention was drawn were: Lloyd v Grace, Smith & Co [1912] AC 716, Uxbridge Permanent Building Society v Pickard [1939] 2 KB 248, United Bank of Kuwait v Hammoud [1988] 1 WLR 1051, Hirst v Etherington [1999] Lloyds Rep PN 938, and Langley Holdings v Seakens (unreported, 19 October 2000).

These cases demonstrate that an innocent principal is responsible for the fraud of an authorised agent who acts within the scope of his authority. As Sir Wilfrid Greene MR said in the Uxbridge PBS case (page 254), it is not within the actual authority of a solicitor’s clerk to commit a fraud. But it is within his ostensible authority to perform acts of the class which solicitors would normally carry out: “so long as he is acting within the scope of that class of act, his employer is bound whether or not the clerk is acting for his own purposes or for his employer’s purposes”.

The Hammoud case concerned an undertaking given by a salaried partner in a firm of solicitors. The question was whether the undertaking gave rise to a contract which was binding on the firm by virtue of section 5 of the 1890 Act. Glidewell LJ formulated the issue (page 1057H) as being whether the giving of the undertaking was an act “for carrying on in the usual way business of the kind carried on by the firm”, the kind of business being that of solicitors. At page 1059C, he defined the proper question in these terms:

“On the facts represented to the plaintiff bank, would a reasonably careful and competent bank have concluded that there was an underlying transaction of a kind which was part of the usual business of a solicitor?”

This question had to be considered objectively. The reference to an “underlying transaction” was dictated by the fact that the relevant act in that case was the giving of an undertaking: it is not part of the ordinary business of solicitors to give undertakings except in relation to underlying transactions of what Lord Donaldson MR called a “solicitorial” nature.

Staughton LJ also emphasised the fact that the relevant inquiry in these cases is to ask whether the transaction reasonably appears to be of a kind that is within the ordinary authority of a solicitor (page 1064D-F)

It so happens that when the paper application for permission to appeal was made in this case by the unsuccessful claimant, it came before me and, without the benefit of oral argument, I refused permission to appeal. The Full Court granted permission after the two lords justices, then forming the court, had heard Mr Quest on the appellant’s behalf.

The appeal now comes before a court of which I am the junior member. Naturally I have listened with great care to the arguments as now developed by Mr Sutcliffe QC and have approached the appeal with an entirely fresh mind. This fresh approach leaves me now persuaded that the judge’s reference to the “untruths” in the recitals to the escrow agreement was more essential to the judge’s decision than I originally thought. I also now consider that the judge was wrong to treat that agreement and the earlier agreement as “shams” in the strict sense of that word.

I have, nevertheless, come to the same conclusion as Dyson LJ in his judgment. Both sides agree that the question is whether the transactions described in the judge’s judgment were within the ordinary course or usual way of business of a firm of solicitors. Once one appreciates that the proposed transaction was that, in return for the transfer of $500,000 and without risk as to that sum, the claimants would within one month receive $2,500,000 (a return of 500% or, if annualised, 6,000%), it can be seen at once that neither that transaction itself nor advising upon it was within the ordinary course of a solicitor’s business. The judge called it preposterous. So it is and I would dismiss the appeal.

For the reasons given by Dyson LJ I too would dismiss this appeal.